The Disposition Effect in Boom and Bust Markets

65 Pages Posted: 5 Feb 2021 Last revised: 27 Jan 2022

See all articles by Sabine Bernard

Sabine Bernard

Leibniz Institute for Financial Research SAFE

Benjamin Loos

Technische Universität München (TUM) - TUM School of Management

Martin Weber

University of Mannheim - Department of Banking and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 26, 2022

Abstract

Prior findings on the disposition effect are derived from data sets which mostly cover boom periods. However, since the drivers of the disposition effect (preferences and beliefs of investors) tend to behave countercyclically, it is crucial to study entire market cycles. We use individual investor trading data from Germany covering several boom and bust periods (2001- 2015). We show that the disposition effect is countercyclical, being higher during busts than booms. Investors are 26% more likely to realize gains in market downturns. Changes in investors’ selling behavior can be linked to changes in risk aversion and beliefs across financial market cycles.

Keywords: Disposition Effect, Financial Market Cycles, Household Finance, Retail Investor

JEL Classification: D14, G11, G28, G40, G51

Suggested Citation

Bernard, Sabine and Loos, Benjamin and Weber, Martin, The Disposition Effect in Boom and Bust Markets (January 26, 2022). SAFE Working Paper No. 305, Available at SSRN: https://ssrn.com/abstract=3779254 or http://dx.doi.org/10.2139/ssrn.3779254

Sabine Bernard (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Benjamin Loos

Technische Universität München (TUM) - TUM School of Management ( email )

Arcisstr. 21
Munich, D-80290
Germany

HOME PAGE: http://www.professors.wi.tum.de/digitalfinance/home/

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
262
Abstract Views
1,229
rank
80,400
PlumX Metrics